Management of
Advances
Dr. Ajit Kumar
AGM & MoF
CAB, PUNE
Version:
College of Agricultural Banking, RBI, PUNE
1
Introduction
• What is Banking?
• Loan Policy
• Bank’s own Guidelines + RBI
Guideline =Loan Policy {each broad
category of economic activity} +
Manual on Loans and advances
• Loan Policy of Commercial Bank visà-vis Cooperative Bank
Date:
College of Agricultural Banking, RBI, PUNE
2
Types of Loan
• Term Loan
• Cash Credit
• Book Debt
• Bill Limit – Bill purchase/ discounting
• WCDL
• Export Credit-Pre shipment (Packing
Credit) & Post shipment Credit
• Retail Loan- Housing, Education etc.
• Overdraft
Date:
College of Agricultural Banking, RBI, PUNE
3
Term Loan
• Long Term Stake; Careful Appraisal
• Project Viability: techno-economic
viability, market, competitors
• Management’s Competence
• Regulatory Clearances
• Credit Opinion Report
• Repayment Capability: DSCR
• Collateral
Working Capital Requirement
• Less stringent appraisal requirement
but greater/ higher post credit
supervision/ surveillance required.
• Under loaning and excess loaning
both are dangerous
• Need based credit
• Periodic stress testing required
Date:
College of Agricultural Banking, RBI, PUNE
5
Working Capital Requirement
• Assessment of working capital
requirement:
• Traditional methods
• Turnover method-upto Rs.1.0 cr. for
non SSI and upto Rs.5.0 cr. for SSI
-Gross sales including excise duty
-for others UCBs may adopt any
method
• Cash Budget method- products of
seasonal nature
Date:
College of Agricultural Banking, RBI, PUNE
6
Traditional Method
Current Liability
Creditors
- 300
Bank borrowing-330
Current Asset
Current assets – 740
1st method:
Current assets – creditors = 740-300=440
25% margin to be deducted= 440-110=330
Current ratio= current asset/ current liability
740/630 = 1.17
Date:
College of Agricultural Banking, RBI, PUNE
7
Traditional Method
Current Liability
Creditors
- 300
Bank borrowing-330
Current Asset
Current assets – 740
2nd method:
(Current asset – margin 25%)- less creditors
740-185=555-300 =255
Excess borrowing75
Current ratio= current asset/ current liability
740/555=1.33
Date:
College of Agricultural Banking, RBI, PUNE
8
Turnover Method (Nayak
Committee)
Current Liability
Current Asset
Creditors
- 300
Current assets – 740
Bank borrowing-330
NWC-740-660=80
Projected Sales- 2000
25%of sales=500 less 5%margin i.e. 500-100=400
Now margin(100) or NWC(80) whichever is higher
to be deducted from 25% of sales
500-100=400 is the permissible finance
Or simplistically 20% of projected turnover i.e.400
Date:
College of Agricultural Banking, RBI, PUNE
9
Working Capital Requirements
• Actual drawals to be allowed on the basis
of DP after excluding unpaid stock
• Banks to ensure regular and timely
submission of monthly statements of
stocks, receivables etc.
• Periodical verification of stock
• Incentive for Loan system
• Banks to laydown policy guidelines for
periodical review of the WC limit and the
same to scrupulously adhered to
Date:
College of Agricultural Banking, RBI, PUNE
10
Interest Rate
• Banks are free to determine lending
rates but it should not be exorbitant
• Interest rate charged by banks
should incoporate risk premium
having regard to the internal rating
of the boprrower
• Interest spread to be rational.
Date:
College of Agricultural Banking, RBI, PUNE
11
Transparent Pricing of loan
• Banks are required to publish the
minimum and maximum interest
rates charged on advances and
display the information in every
branch{Base Rate}
• A Board approved Policy for charging
of Penal Interest
• No Penal Intt. for loans upto Rs
25000/-for priority sector borrowers.
Date:
College of Agricultural Banking, RBI, PUNE
12
Pricing of loan
• Banks should ensure that the total
interest debited to an account should
not exceed the principal in respect of
short term advances granted to
small and marginal farmers. SMF=
land holding of five acres and less.
• An appropriate ceiling of interest+
processing and other charges to be
decided and publicised.
Credit facility to a new borrower
• UCBs should not finance a borrower
already availing credit facility from
another bank without obtaining a ‘No
objection
Certificate’
from
the
existing financing bank (as per
declaration of the borrower/financial
statement) – Credit opinion report.
Date:
College of Agricultural Banking, RBI, PUNE
14
Opening of Current Accounts
• A declaration that the borrower is not
having any credit facility with any
other bank.
• If yes, NoC required from that bank
• If no response to the request for NoC
is received, account may be opened
after a minimum waiting period of a
fortnight.
Date:
College of Agricultural Banking, RBI, PUNE
15
• Certification of accounts of non
corporate borrowers – Income tax
Act 1961
• UCBs to ensure that borrowers do
not default of payment of statutory
dues like PF etc.
Date:
College of Agricultural Banking, RBI, PUNE
16
Loan Appraisal
• Proper Appraisal of Loan
• No oral sanction
• Deviation to be recorded- sanction
within discretionery powers
• Adhoc sanction only when original
limit utilised fully and supported by
proper documents
Monitoring of accounts
• Ensure end use of fund
• Ensure that security hypothecated/
pledged to the bank is not tempered with
• Early warning system: Recognition of
potential NPA
Date:
College of Agricultural Banking, RBI, PUNE
18
Monitoring operations in loan
account
• Monitoring end use of fund/fund flow
to and fro- no loan for FD/KVP
• The
primary
responsibility
for
preventing misuse of funds rests
with the management of banks.
UCBs to take appropriate steps to
review and tighten control measures.
Annual Review of Advances
Valuation of properties –
empanelment of valuers
Exchange of credit information
• UCBs required to take membership
of at least one credit information
company and provide credit data
(positive as well as negative) to the
credit information company.
• - to incorporate suitable clauses in
the loan agreement for the purpose.
Date:
College of Agricultural Banking, RBI, PUNE
22
Disclosure of defaulting borrowers
• Scheduled UCBs are required to
submit to RBI at the end of Sept and
March every year data on defaulting
doubtful,
loss
and
suit
filed
borrowers with outstanding limit of
Rs.1.0 cr. and above
• Data on suit filed case of Rs.1.0 cr &
above and willful defaulters of
Rs.25.0 lakh and above is availbale
on CIBIL site- www.cibil.com
• Scheduled UCBs to report to CIBIL
all cases of willful default Rs.25.0
lakh and above
Date:
College of Agricultural Banking, RBI, PUNE
23
Loan Restructuring
• There
will
not be
any asset class
degradation upon restructuring in following
cases:
• (i) Project Financing (ii) borrowers engaged
in important business activities (iii) housing
loan
• This exceptional treatment is not available to
• (i) consumer and personal advances
• (ii) Advances to traders
Date:
College of Agricultural Banking, RBI, PUNE
24
Loan Restructuring
• In case of default in payment of agricultural
loans due to natural calamities UCBs on their
own may decide to
- convert the short term production loan into a
long term loan or reschedule the repayment
period and
- sanction fresh short term loans
- these fresh/ restructured loans will not be treated
as NPAs and will be governed by fresh terms
and conditions
Date:
College of Agricultural Banking, RBI, PUNE
25
Loan Restructuring
• PRECONDITIONS:
(i)Provision for diminution in the fair value
of restructured Advances
• Interest sacrifice to be calculated on the
basis of discounting present value of cash
flow with both pre and post restructuring
rate of bank’s BPLR+ appropriate term
premium +credit risk premium
• Simpler method:5% of the exposure
(ii)The dues of the bank are fully secured
with certain exceptions
Date:
College of Agricultural Banking, RBI, PUNE
26
Loan Restructuring
• Exceptions of (ii)
• (a) SSI borrowers where outstanding
is up to Rs.25.0 lakh
• (b) Infrastructure projects with an
escrow account with valid legal claim
and where the cash flows generated
form the project are adequate for
repayment of the advance
Date:
College of Agricultural Banking, RBI, PUNE
27
Gold Loan up to Rs.1.0 lakh
Date:
College of Agricultural Banking, RBI, PUNE
28
Advances to Real Estate
• UCBs
should
frame
comprehensive
prudential norms relating to the ceiling on
the total amount of real estate loans,
single/aggregate limit for such loans,
margins, security, repayment schedule etc
• Policy should be approved by the Board
• While framing the policy the banks may
also consider for inclusion the National
Building Code framed by Bureau of Indian
Standards (BIS)
Date:
College of Agricultural Banking, RBI, PUNE
29
Bill Discounting
• Banks to have Board approved policy
on bill discounting-proper appraisal
• Banks should not extend bill
discounting facility or other non fund
based facilities to non-constituent
borrower.
• No accommodation bills; onus on
bank to ensure genuineness of trade
transactions- any violation Penal Action
Date:
College of Agricultural Banking, RBI, PUNE
30
•
Date:
THANK YOU
College of Agricultural Banking, RBI, PUNE
31